A company produces two (2) products, “ore” and “tin”. The following sales forecast for both products was decided on for the financial year January 1, 2015 to December 31, 2015: Details Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Ore 5,000 6,500 7,000 5,500 24,000 Tin 3,900 4,300 5,000 4,700 17,900 Notes: The company planned to sell one unit of Ore for $600 and one unit of tin for $500 during 2015. The sales forecast for the first quarter of 2016 is 6,000 units of ore and 4,500 units of tin. The closing stock level for both products at the end of each quarter is to be held at a level equal to fifteen percent (15%) of the budgeted sales for the next quarter. At the start of 2015 there were in stock 450 units of ore and 600 units of tin. To make one unit of ore three (3) units of raw material ZB are required, while four (4) units of raw material AX are required to make one unit of tin. The cost of raw material ZB Is $70 per unit, while the cost of raw material AX is $60 per unit. Closing raw material stocks in units in store at the end of each quarter is to be equivalent to twenty percent (20%) of the forecasted sales for the following quarter. At the start of 2015 there were 1,500 units of raw material ZB and 2,400 units of raw material AX in store. Required: The direct raw materials usage budget for both products for 2015. Prepare the direct raw materials purchases budget for both products for 2015.
Cost-Volume-Profit Analysis
Cost Volume Profit (CVP) analysis is a cost accounting method that analyses the effect of fluctuating cost and volume on the operating profit. Also known as break-even analysis, CVP determines the break-even point for varying volumes of sales and cost structures. This information helps the managers make economic decisions on a short-term basis. CVP analysis is based on many assumptions. Sales price, variable costs, and fixed costs per unit are assumed to be constant. The analysis also assumes that all units produced are sold and costs get impacted due to changes in activities. All costs incurred by the company like administrative, manufacturing, and selling costs are identified as either fixed or variable.
Marginal Costing
Marginal cost is defined as the change in the total cost which takes place when one additional unit of a product is manufactured. The marginal cost is influenced only by the variations which generally occur in the variable costs because the fixed costs remain the same irrespective of the output produced. The concept of marginal cost is used for product pricing when the customers want the lowest possible price for a certain number of orders. There is no accounting entry for marginal cost and it is only used by the management for taking effective decisions.
A company produces two (2) products, “ore” and “tin”. The following sales
|
Details |
Quarter 1 |
Quarter 2 |
Quarter 3 |
Quarter 4 |
Total |
|
Ore |
5,000 |
6,500 |
7,000 |
5,500 |
24,000 |
|
Tin |
3,900 |
4,300 |
5,000 |
4,700 |
17,900 |
Notes:
- The company planned to sell one unit of Ore for $600 and one unit of tin for $500 during 2015.
- The sales forecast for the first quarter of 2016 is 6,000 units of ore and 4,500 units of tin.
- The closing stock level for both products at the end of each quarter is to be held at a level equal to fifteen percent (15%) of the budgeted sales for the next quarter.
- At the start of 2015 there were in stock 450 units of ore and 600 units of tin.
- To make one unit of ore three (3) units of raw material ZB are required, while four (4) units of raw material AX are required to make one unit of tin.
- The cost of raw material ZB Is $70 per unit, while the cost of raw material AX is $60 per unit.
- Closing raw material stocks in units in store at the end of each quarter is to be equivalent to twenty percent (20%) of the forecasted sales for the following quarter. At the start of 2015 there were 1,500 units of raw material ZB and 2,400 units of raw material AX in store.
Required:
- The direct raw materials usage budget for both products for 2015.
- Prepare the direct raw materials purchases budget for both products for 2015.
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